A term loan gives businesses cash to grow. A credit card covers small, repeatable expenses. But what if you need something in between—capital that’s flexible, reusable, and fast? That’s where a business line of credit comes in. It’s one of the most adaptable tools in a company’s financial tool kit. And in 2023, 34% of US small businesses with employees reported using a line of credit on a regular basis.

Below, we’ll explain how business lines of credit work, whom they’re for, and how to use them effectively.

What’s in this article?

• What is a business line of credit?
  
• How does a line of credit work for small businesses?
  
• What are the pros and cons of a business line of credit?
  
• How can you qualify for a business line of credit?
  
• How do you apply for a business line of credit?
  

What is a business line of credit?

A business line of credit is revolving, giving you access to a set amount of money that you can borrow from, pay back, and borrow from again on your own timeline. Think of it like a business credit card, but with access to cash.

There are two main types of business lines of credit:

• Secured: These are backed by collateral such as inventory, real estate, and receivables. They generally have lower interest rates and higher limits.
  
• Unsecured: These don’t require collateral, and approval depends heavily on your creditworthiness. You might pay a higher interest rate or get a smaller limit.
  

How does a line of credit work for small businesses?

Once the lender approves you for a business line of credit, it sets a credit limit. You can borrow up to that amount, repay what you’ve used, and then borrow again. You pay interest on only the portion you draw. This flexibility makes business lines of credit ideal for managing cash flow, covering short-term costs, and seizing time-sensitive opportunities.

Businesses commonly use lines of credit to:

• Fill in cash flow gaps between invoicing and payment
  
• Purchase inventory or supplies
  
• Cover operating expenses in slower months
  
• Respond quickly to unplanned costs or short-term opportunities
  

Once your line is open, you can access funds through a lender’s dashboard, portal, or app. You typically transfer the funds to your business bank account, although some lenders issue cards or checks tied to the credit line. Interest starts accruing the day you draw funds.

Repayment terms vary, but many lenders treat each draw like a mini loan. You repay principal and interest on a fixed monthly schedule. Repayment terms between 6–24 months are most common, but some lenders offer longer terms. As you repay, the available credit replenishes (as with a credit card, but often with higher limits).

Compared to credit cards, lines of credit are a better fit for working capital needs. They’re built for direct cash access, larger expenses, and more fluid repayment, while credit cards are ideal for small, frequent purchases.

What are the pros and cons of a business line of credit?

A business line of credit can be one of the most versatile financial tools available to a growing company, but that flexibility comes with trade-offs. Here’s a closer look at the advantages and limitations.

Pros

• Flexible access to working capital: Once you’re approved, funds are available on demand. You can draw, repay, and draw again without reapplying. That kind of financial flexibility can be an important asset, particularly when revenue is uneven or unexpected expenses appear.
  
• Interest on only what you use: You don’t pay interest on the full credit limit—only the amount you draw. That makes it more cost-efficient than a lump-sum loan when you don’t need the full amount up front.
  
• Accessibility: Compared to traditional term loans, credit lines can be more accessible, especially from online lenders. Some offer smaller credit lines to newer businesses, those with shorter operating histories, or business owners with less-than-perfect credit.
  
• Lender relationships: Consistent, responsible use of a business line of credit (drawing, repaying, and keeping balances manageable) can strengthen your credit profile if your lender reports to credit bureaus. It also shows lenders that you manage capital well, which can lead to larger lines or better terms over time.
  
• Competitive rates: If your business is well established and you have good credit, you might qualify for lines with low interest. These rates are often lower than those of credit cards and, in some cases, comparable to those of term loans.
  

Cons

• Shorter repayment windows: Lines of credit generally have shorter repayment terms than loans, often between 6–24 months. That works well for short-term needs but doesn’t give you much time to pay down larger balances.
  
• Higher fees: Some lenders charge annual maintenance fees, draw fees, wire fees, or inactivity fees, in addition to interest. These costs can make the line more expensive than expected, particularly if you borrow only occasionally or in small amounts.
  
• Risk of overuse: Because the money is simple to access, it can be easy to draw from a credit line too often. Without a clear repayment plan, businesses can enter a cycle of borrowing and making minimum payments that’s hard to break.
  
• Potential to be revoked: Your lender can lower your credit limit or freeze your line altogether, especially if you violate the terms of the agreement. Some lenders require periodic reviews or annual renewals. A line of credit isn’t a guaranteed safety net if your business encounters trouble.
  
• Collateral or personal guarantee requirement: Depending on the lender and the size of the credit line, you might have to offer collateral (e.g., equipment, receivables) or sign a personal guarantee. That can put your business or personal assets at risk if you default.
  
• Not for long-term needs: Lines of credit are designed for short-term working capital, not major investments. If you want to buy equipment, open a second location, or fund a long-term project, a term loan or other type of financing might be a better fit.
  

How can you qualify for a business line of credit?

Approval for a business line of credit depends on how well your business (and, often, you as the owner) signal reliability to a lender. Each lender weighs things differently, but here are the core factors they’ll look at.

Personal and business credit history

Lenders consider personal credit scores, particularly for the owners of small or early-stage businesses. A strong credit score helps, but many online lenders accept lower scores if other factors are solid. If your business has its own credit profile, that’ll be evaluated too. Clean payment history, responsible use of other sources of credit, and a low debt load will all strengthen your case.

Revenue and cash flow

Lenders want to see that your business earns enough to repay what you borrow. Beyond revenue, steady cash flow (preferably documented through bank statements) is key. Peaks or dips aren’t deal-breakers, but you should be able to explain them.

Time in business

Longevity signals stability. Traditional banks typically want to see at least two years of operating history. Online lenders are often more flexible, sometimes working with businesses that have existed only six months. That said, newer businesses might be approved for smaller credit lines and face higher rates.

Collateral or guarantees

Some lines are secured, but others are not. If you can offer collateral (equipment, inventory, or receivables), you might qualify for better terms or a higher limit. If not, the lender could require a personal guarantee. That means you’re personally liable if the business can’t repay.

Other financial indicators

Lenders might also look at:

• Debt-to-income or debt service coverage ratio
  
• Profitability trends
  
• Industry risk profile (e.g., restaurants might be viewed as higher risk)
  
• Existing debt or open credit lines
  

Even if your metrics aren’t perfect, clarity helps. If revenue dipped for a quarter or you’ve got one large client, prepare to share the context for why. Underwriters are more likely to approve applicants who understand their financials and can explain them clearly.

How do you apply for a business line of credit?

The application process isn’t complicated, but it does require a bit of preparation. Before you apply, consider your financial position. Determine your business’s monthly revenue. What’s your current debt load? Check your personal and business credit scores too. If your credit is borderline, it might be worth spending a few weeks paying down existing balances or correcting reporting errors before you apply.

Once you’re ready to apply, here’s what you should do.

Choose the right lender

Banks and credit unions have lower rates and higher limits, but stricter requirements and slower approval. Online lenders and fintech platforms have faster applications, faster funding, and more flexibility with newer businesses, but rates might be higher. Check whether the platforms you already use offer lines of credit: if you process payments through Stripe, for instance, you might be eligible for a financing alternative based on your sales history.

Compare your options based on:

• Credit limits
  
• Interest rates and fees
  
• Approval criteria
  
• Required documentation
  
• Speed of funding
  

Gather documentation

Each lender will have its own specific application requirements. But the following pieces of documentation are often required:

• Personal ID (e.g., driver’s license, passport)
  
• Business formation documents
  
• Business licenses and tax IDs
  
• Bank statements
  
• Business tax returns
  
• Personal tax returns (especially if the business is small or new)
  
• Profit and loss statements, balance sheets, or other financials
  
• A description of how you plan to use the credit
  

If you’re applying for a secured line, you’ll also need documents that show the value of any assets you’re pledging.

Submit the application

Online lenders might give you a decision within hours, while traditional banks might take a week or longer. You’ll likely be asked to authorize a credit check and provide access to your business bank account or accounting software. Prepare for follow-up questions or document requests.

Once you’re approved, review the agreement carefully:

• What’s the interest rate structure?
  
• Are there draw fees, annual fees, or early repayment penalties?
  
• What’s the repayment schedule?
  
• Is there a required rest period when you must bring the balance to zero?
  
• Are there any usage restrictions?
  

Once your line is active, you can draw funds as needed. Repay on schedule to keep the line open and in good standing. Set calendar reminders, automate payments if possible, and track usage closely. Timely repayment builds your credit profile and increases your chances of securing higher limits or better terms later.